ECONOMYNEXT – Sri Lanka’s state-run Ceylon Petroleum Corporation is seeing larger losses as world oil prices continue to rise, officials said while a second distributor, Lanka India Oil Corporation has raised prices to help reduce credit funded losses and support the rupee.

“At the time when we asked for a price increase from the government on October 01, the price of one barrel of 92-Octane petrol in the international market was 85.80 US dollars. Diesel was 88.52 dollars, Ceylon Petroleum Corporation Chairman Sumith Wijesinghe told reporters.

“And from October 01 to October 22, the price of a barrel of Patrol has increased to 99.30 US dollars and Diesel to 97 US dollars. Because of the increase the Corporation is making a bigger loss than at the time we made the request.

In the first week of October CPC said it was losing 14.56 rupees from petrol after paying taxes and losing 31.46 rupees from diesel after paying taxes. Fuel is a key source of taxes for most government and Sri Lanka charges higher taxes from petrol than diesel.

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“With the international price of fuel increasing in October, the loss from one litre of diesel is 38.45 rupees to the Ceylon Petroleum Corporation,” Wijesinghe said.

“And from petrol 92 it is a 23.19 rupee a litre loss. And LIOC said due to this price increase in the international market they have a loss of 20 rupees from one litre of petrol and 40 rupees from one litre of diesel. There is a loss for both Ceypetco and LIOC due to the price increase.”

Lanka IOC has raised the price of both petrol and diesel by 5 rupees a litre. As a result the demand for CPC fuel from customers will increase and so will the losses.

CPC however has a tax advantage compared to LIOC as crude coming to its refinery is taxed at a lower rate than refined products.

“We know the public will always go to the place with a lesser price. Because of that, with more people coming to Ceypetco stations, they have indirectly increase Ceypetco’s loss by increasing their prices.

“LIOC doesn’t have to inform the Ceypetco about their price increase. According to the agreement between them and the government they have to do business and supply a percentage of the fuel demand in the country.

“When they increase the price Ceypetco will have to bear some percentage of that market percentage as well.”

LIOC has about 10 to 15 percent of the fuel market in the country.

When CPC borrows from the banking system to fund losses, interest rates have to rise. However the central bank usually prints money to keep rates down, triggering a currency crises and forex reserve losses.

At the moment the central bank is targeting a 6.0 percent overnight rate with injections.

Sri Lanka is now in a severe currency crisis due to printing money to pay state worker salaries and keep rates down.

By raising prices, LIOC helps strengthen the rupee and keep the national economy stable. However if customers shift to CPC the effect is reduced.

When fuel is market-priced disposable incomes of fuel users reduce, and non-oil imports fall, keeping the external sector in balance.

“There is no decision to increase the prices at the moment,” Petroleum Minister Udaya Gammanpila said.

“We have asked for a relief from the ministry of finance, and we expect that relief. With the general public already taking a hit, we are trying to face this loss as long as we can.”

CPC has also borrows dollars from abroad to keep domestic prices down, in another cascading policy error that occurs after the central bank prints money to keep rates down.

Sri Lanka is now trying to borrow a total of 4.1 billion US dollars (3.6 billion dollars from Oman and 500 million dollars from India) after printing money which will add to the total external public sector debt.

Global oil prices are now rising as the US Fed prints money weakening the US dollar in the so-called Powell Bubble. Oil prices are now rising towards levels seen in the Greenspan-Bernanke bubble which burst in 2008.

The Fed is claiming that the oil prices is ‘transitory’ but classical economists have said that Fed chief Jerome Powell is delusional as money supply in the US is rocketing with healthy credit growth.

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Sri Lanka’s currency fall has amplified the rupee price and losses of the petroleum utilities.

“When currencies fall and stock holding costs go up, credit will move up and more money will have to be printed even as people buy less goods,” EN’s Economic Columnist said in early 2021 warning the central bank against money printing to keep rates down.

“On top of that state energy utilities will see their costs rise. If prices are not adjusted more money and credit will go to those firms.

“In fact in Latin American pegs, energy utilities are a key driver of meltdowns.” (Colombo/Oct25/2021)